CAG ConAgra Brands Inc

We have maintained our long-term ‘Neutral’ recommendation on Dean Foods Company (DF) with a target price of $11.00 per share. Dean Foods is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. The company operates primarily on a local basis, competing mostly with local and regional operators.

To muddle through the declining fluid milk processing profits due to increased money-offs on private label milk distribution and weak sales volume, Dean Foods is taking prudent steps, including price realization by passing input cost inflation to customers, cost reduction initiatives and increasing volume performance. These fundamental steps will facilitate in stemming the decline while rebuilding the company’s profitability.

Moreover, Dean Foods continues to make headway in its efforts to achieve the lowest cost position in the industry. The company has benefited from its continued focus on cost reduction initiatives across the businesses including headcount reductions. The company also intends to move aggressively toward streamlining its cost structure while aiming to achieve total cost savings of $300.0 million by the end of fiscal 2011 under the cost reduction program started in 2009.

Further, Dean Foods has taken strategic steps to optimize its capital allocation and concentrate on core business activities. Consequently, during current fiscal 2011, the company has divested its underperforming business unit operations of dairy processing facility in the Southeast and expects more closures over the balance of the year.

However, Dean Foods’ business is heavily dependent on commodities such as raw milk, soybeans, and fuel and other. The company’s performance may be adversely affected due to volatility in the prices of these commodities, which are based on market conditions and governmental regulations.

In addition, Dean Foods is heavily dependent on a handful of customers, including large discounters, supermarkets and warehouse clubs. This considerably reduces Dean Foods’ pricing power against these giant retailers, thereby exerting pressure on margins and limiting profitability.

Above all, in the recent years, the retail grocery industry has experienced significant consolidation, and as a result, competition has intensified among dairy product suppliers. Dean Foods experiences stiff competition, especially at the processor level, in all major product lines and geographic markets. Therefore, the company could suffer significantly from the loss of any large regional grocery chain. Dean Foods competes not only with various dairy processors for shelf space, but also with various beverages and nutritional products. The company’s major competitors include Kraft Foods Inc. (KFT) and ConAgra Foods Inc. (CAG).

 
CONAGRA FOODS (CAG): Free Stock Analysis Report
 
DEAN FOODS CO (DF): Free Stock Analysis Report
 
KRAFT FOODS INC (KFT): Free Stock Analysis Report
 
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